History Has Steered Folks to Environmental, Social and Governance Investing.
In this Milwaukee Journal Sentinel article from July 15th, Tom Saler explores socially responsible investing (SRI) and breaks down some recent high-profile examples.
Read July article.

 

New Firm Targets Socially Responsible Investors.
In this article from January 9th, Milwaukee Journal Sentinel reporter Kathleen Gallagher explores Greg Wait's launch of a new company that combines socially responsible investing and online investment advice.
Read January article.

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's October 17th article, Kathleen Gallagher and Greg Wait discuss the recent rise of environmental, social and governance, or ESG investing. Greg provides insight into how reduced risk and improved returns are causing money managers to include ESG investing in their portfolios. Read October article.

 

Responsible Investing: Creating Financial and Non-Financial Value by Greg Wait. Do investors sacrifice returns in pursuit of their goal of advocating for a better world in which to live?
Learn more.

 

Ten-Year History of Investment Manager Performance by Greg Wait. As part of our process, we have conducted investment manager research and due diligence resulting in manager or fund recommendations to our clients. Here are our findings.

 

The month of September, 2013 marked the 10-year anniversary of Falcons Rock serving our clients and building relationships. We are grateful for all the years of friendship, loyalty, and support, and look forward to our next decade!

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's July 20th article, Kathleen Gallagher and Greg Wait discuss the rising U.S. Treasury rates and using duration as a measure of risk. Greg's comments relate to whether we'll be "looking back on this short-term increase in yields as the warning shot for the much-anticipated longer-term rise in interest rates." Read July article.

 

Dec 9, 2012, Journal Sentinel's Kathleen Gallagher interviewed Greg Wait on current Investment Trends. Read the full article: "Low-quality stocks continue to provide strong returns."

 

We've Grown! Meet our new investment consultant: Tony Sebranek.

 

Investment Trends column of Milwaukee Journal-Sentinel shows Top-Down investment strategies are achieving positive results.
Read article on Top-Down Investing

 

Additional articles in the Milwaukee Journal Sentinel featuring Falcons Rock:
One is a fascinating story about a Mequon drug development company, which has a few of our clients as private investors.
Read article about our angel investors

 

Another features us in the Market Trends column: Strategy targets uncertain economy - and how Falcons Rock confronts specter of slow growth.
Read how we help clients get ready

 

There is a great deal of debate in the investment industry regarding active vs. passive (indexing) investment management.  We researched this topic and the results might be surprising to you.  Please see our research paper on this subject...more

 

We have experienced interesting situations with our clients. To update you on our firm’s activities, check out examples of recent work we have done for our clients...more

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2013 Quarter 1 Market Review

Spring is upon us, and so is the beginning of a new baseball season. While our Milwaukee Brewers are off to a tough start, with an extensive injury list, I love the start of each baseball season. It signifies that warmer weather is ahead and we will be able to enjoy the multitude of cycles that inevitably occur during the long campaign toward the fall playoffs, when the benefit of a lot of hard work pays off for a few select teams. Play ball with a winning investment lineup

Building a winning baseball team is much like building a sound investment program.

The key to success over the cycles of a long season centers on putting each player in a position where they can perform individually, but with the diversification necessary to make for a competitive team. A baseball team would not score many runs if their entire roster consisted of pitchers! Nor would a team be very good if their offensive lineup consisted of nothing but power hitters who struck out a lot. Let's construct an investment lineup like we would a baseball team:

  • Pitchers = Core Stocks — The pitching staff needs to be the core foundation for getting through a long season. While pitchers will have their ups and downs, their long-term performance should be positive, much like a core stock portfolio. The pitching staff will consist of right-handers and left-handers, as well as middle relief pitchers and closers…and a core stock portfolio should include value and growth stocks, large cap and small cap stocks, US and international stocks.
  • Defensive Players = Core Bonds — On a baseball team, the middle of the field (catcher, shortstop, second baseman, center fielder) should be made up of very good defensive players. These players can help the pitchers when they are not striking out opposing hitters, by making the routine plays and getting outs for the team. The defensive players in an investment portfolio are fixed income securities like cash, bonds, and asset-backed securities like mortgages.
  • Offensive Players = Aggressive Stocks — Every baseball team needs some power to generate enough runs to win ballgames. In an investment portfolio, the home run hitters might include aggressive growth or emerging markets stocks. While these investments may strike out on more occasions than a manager would like, the occasional three-run homer makes it worth the patience.
  • Role Players = Alternative Strategies —Utility players on a baseball team come in all shapes and sizes, like alternative investment strategies. These strategies can be used to further enhance or diversify an investment portfolio, and may include hedge funds, arbitrage funds, global macro funds, long/short funds, private equity, etc.

Management Strategy

Good baseball managers know how to make out their lineup in a way that gives their team the best chance of winning, with no guarantees…just like designing an investment portfolio. The two teams that make it to the World Series each year generally have enjoyed little turnover (due to injuries or poor performance) among players during the regular season, but may add players late in the year for a playoff boost.

Given each of our clients' unique objectives, we develop portfolios that provide the best chance of achieving their goals. We attempt to get the strategy right up front, so that little turnover is required within the portfolio, while continually doing research to find investment products that can enhance returns or reduce risk. It has been well documented that most investors do not have the psychological makeup or investment discipline to adhere to a long-term strategy. Over the past 20 years, while stocks have earned over 8% annualized, bonds have earned over 6%, real estate has earned over 11%, and inflation has been 2.5%, the average investor has realized an annual return of only 2.3% (analysis by Dalbar, Inc.). That is not nearly enough to win the World Series!

First Quarter 2013 Review

Following a last minute political agreement on January 1st to avoid the "fiscal cliff," tax fears eased and the U.S. stock market soared in the first quarter of 2013. Every sector of the stock market finished with substantial gains, led by health care, consumer staples, and utilities. The stock market has now reached an all-time high and is up 132% from its bottom on March 9, 2009.

Here's an interesting fact: if you had invested all your money in the stock market at its previous peak (10/9/2007), you would have been one of the worst market timers in history as your stock portfolio would have lost 57% over the next seventeen months. However, had you held your stock market position through the end of this past quarter (3/31/2013), you would be at breakeven on price, but would've earned 2% in dividends…which would have exceeded inflation as well as the returns of cash, and 10-year Treasury bonds.

With a bullish trend developing in the equity markets, commodities finished essentially flat in the first quarter. The downward trend in metals continued, with gold (-4%), silver (-5%) and copper (-6%) prices all falling. Energy prices saw modest gains during the quarter.

Bond returns were muted in the first quarter as interest rates rose. The strengthening U.S. dollar led to losses in many global bond indexes and dampened returns in foreign stocks held by U.S. investors. High yield bonds delivered a modest return, but the broad aggregate bond index was down slightly.

Here are the returns for select market indices for Q1 2013 (as stated in U.S. dollars):2013 Qtr 1 Returns on Market Indices

Outlook

The U.S. economy seems to have plenty of room to grow, as the current recovery has been slow by most standards. Most investment managers and economists we work with are generally optimistic about the stock market going forward, especially compared to the bond market. Real U.S. GDP growth is expected to remain subdued as the effects of sequestration (government spending cuts) are beginning to be felt across the economy. [Note that military vehicle maker Oshkosh Corp. recently announced the elimination of 900 jobs due to U.S. budget cuts.] Along with increased taxes, the early March implementation of the sequester is expected to produce an economic drag of about 2% in 2013. Fortunately, the consumer sector seems to be weathering the storm better than expected so far. Household net worth (assets less liabilities) is near record levels and the household debt service level is at a 30+ year low. Also, while the corporate sector has not been spending freely primarily due to political uncertainty, balance sheets are very strong and overweight to cash allowing room for additional capital expenditures in 2013. Corporations also have historically low leverage and interest rate expenses, allowing for higher dividends and share buybacks.

Europe is still in a recession (and falling), as the European Union has not been able to find a way to solve their problems. However, valuations of stocks in developed countries are currently quite low and may represent a long-term buying opportunity. While there has been a pause in the growth of emerging markets (China, India, Russia, Brazil, Korea, etc.), these economies have accounted for 81% of global economic growth over the last three years. Most of these countries have lower debt to GDP ratios than the developed world and their economies have been integrated into the rest of the world through trade. Emerging markets stocks now represent 12% of global stock market capitalization and 15% of earnings. There is no question that these emerging economies are the growth engine of the world.

The real (after inflation) yield of 10-year Treasury bonds is nearly zero (0.09%), far lower than the historic average real yield of 2.55%. Many investors have wondered about the effects of rising interest rates, which seem inevitable at some point in the future. We know that rising interest rates negatively affect the price of bonds, and fixed income money managers are well aware of this relationship. Most bond funds carry a lower duration (measure of interest rate risk) than the benchmark indexes in anticipation of a rising rate environment, but that will not completely shield bonds from losses if interest rates spike upward quickly. Will rising interest rates lead to subpar stock performance? History tells us that there is a positive correlation between stock market returns and rising interest rates…while yields are below 5%. However, when interest rates are above 5%, stock market returns tend to be negatively correlated. This is intuitive, as high and rising interest rates lead to increased cost of capital, thereby reducing profits. However, because current yields are at historic lows, an increase in interest rates should not serve as an impediment to the stock market for quite some time.

The risks to our economy are essentially the same as they have been for the last few years. Excess government debt, federal budget deficits and aging demographics are headwinds to nearly every developed country around the globe, including the U.S. Political divisiveness and uncertainty continue to discourage investment. However, just like with a playoff contending baseball team, proper portfolio diversification and adherence to a disciplined strategy will result in a strong likelihood of achieving investment goals.

Thank you for being a client of Falcons Rock.

Greg Wait, President of Falcons Rock

Gregory D. Wait, President
Falcons Rock Investment Counsel, LLC

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